You are ready to turn your passion into a new business venture. You have your ideas worked out, production and suppliers located, capital raised and marketing ideas that are about to jump out of your head. But before you get too ahead of the game, it is best to figure out what type of business structure works the best for your goals. Each one has different costs, tax burdens and legal implications that must be explored. Here is how each one breaks down.
Sole Proprietor is the easiest business structure to set up, there is no formal action even required. In fact, you may already be one and not realize it. Your status as owner comes from your business activities alone. There is no separation between owner and company, which means they are viewed as one entity. While you alone are the beneficiary of your company’s profits, you are also responsible for all the debt and losses incurred. This also means that your business is not taxed separately.
• Easy and inexpensive to form
• Complete Control
• Easier Tax Preparation
• Personal Liability
• Total Financial and Work Burden
Limited Liability Corporation (LLC)
Limited Liability Corporation or “LLCs” blend the limited liability features of a corporation with the tax and operational flexibility of a partnership. Profit and losses are passed through the LLC to the members, who then report them on their individual returns.
• As the name implies, Limited Liability
• Profit Sharing
• Less Record Keeping
• Limited Life – when one party leaves, the LLC is dissolved.
• Self-Employment Taxes
Cooperatives are normally formed to benefit all the members with specific goods or services. Normally an elected board of directors and officers run the cooperative itself and members vote on the direction it takes. The profits are shared among members and members normally purchase shares to join. This business structure is popular among healthcare, retail, agricultural, art and restaurant industries.
• Less Taxes
• Some grants available for Cooperatives means less start-up money.
• Less production costs
• Perpetual Existence
• Democracy is the defining element of the cooperative.
• Slower Cash Flow
• Lack of participation by members
Sometimes referred to as a C Corporation, is an independent legal entity owned by shareholders. Corporations tend to be more complex to form with expensive fees and more complex tax and legal requirements. This type of business structure is usually used on larger companies with more employees. Corporations also have the opportunity to share ownership shares in the business through stock offerings.
• Limited Liability
• Attracts quality employees
• Easier to raise capital
• Tax Breaks
• Costly and time-consuming
• Double Taxation
• Lots of Paperwork
A partnership is a single business with shared ownership between two or more people.
There are three different types of partnerships: General Partnerships; Limited Partnerships; Joint Ventures. Each of these types vary in terms of how profits, liabilities, and management responsibilities are shared and distributed, as well as how long a partner may be involved with the business venture.
• Easy and inexpensive
• Shared financial responsibility between partners
• Complementary Skills
• Employee incentives to become partner
• Joint and Individual Liability
• Shared Profits
S Corporations also known as S Corp are a special type of corporation created through an IRS tax election. By electing to be an S Corp, double taxation is avoided. Unlike a C corporation, the profits and losses are passed directly to the shareholders personal tax return.
• Tax savings
• Business Expense Tax Credit
• Independent Entity Life
• Stricter Operational Processes
• Shareholder Compensation Requirements
These are just some of the features of each structure, we would be happy to look over your business and give you more details on which structure would most meet your needs.
Information from https://www.sba.gov/starting-business/choose-your-business-structure